Category: Indirect Taxes

Despite automation in GST, errors in tax filing have been a norm for business enterprises. They arise from voluminous data, manual interventions, technical intricacies and frequent amendments. The errors are noticed during internal reviews, statutory audits, annual filings or eventually through departmental actions.

The Goods and Services Tax Network (GSTN) system is founded on a complex fiscal architecture involving multiple stake holders whose compliance is unified on a single platform and settlement system. Errors may have an impact on the inter-government settlement of revenue. Taking cognizance of this, the GST law has not permitted rectification of previously filed returns as it would lead to frequent disturbance in such settlements.

Though many errors were addressed at early stages, some disputed cases reached higher legal fora. The judiciary played a pivotal role in clarifying the statutory framework governing such errors, while balancing the need for tax certainty with fairness to taxpayers. In this article, we highlight the array of errors committed in the prominent forms, with legal resolutions provided by the Courts. Specific focus would be made on the errors committed in Forms GSTR-1/3B in the later part of the article.

TRANSITION RETURNS – SUPREME COURT’S INTERVENTION

One of the most prominent judicial interventions concerned the transition returns, where taxpayers’ errors triggered a torrent of litigation. During trial-and-error phase of GST development, taxpayers committed bona-fide errors due to requirement of complex data inputs. Being a one-time exercise and lack of prior experience, many taxpayers failed to report required supporting data resulting in legal disputes over credit entitlement. Moreover, the said return had the peculiarity of the original due date coinciding with the revised return date, leaving the taxpayer perplexed. High Courts were flooded with grievance over errors committed by taxpayers. Grievance redressal committees were formed by the tax administration which addressed case-specific issues. Acknowledging the procedural confusion and inexperience, the Supreme Court (in Filco Trade Centre’s case¹) directed reopening of transition return filings for a limited period, enabling taxpayers to correct their mistakes. This intervention was conditional – the CBIC issued circulars and guidelines, mandating officer verification before any credit could be recorded in the Electronic Credit Ledger. Genuine claimants ultimately received their credits, though only after enduring lengthy litigation and verification procedures (Article published in January 2021 may be referred).

1 2022 (63) G.S.T.L. 162 (S.C.)

E-WAY BILL – PROPORTIONALITY AND INTENT

E-way bills were generally backed by supporting invoices which ensured that the taxes due on the consignment would be duly paid. Though E-way bills were documents for movements, many officers placed excessive importance and treated it on par with a tax-invoice. For example, despite the tax invoice reporting the correct data and tax liability, incorrect reporting of delivery address in e-way bill was treated as a ‘contravention’ resulting in potential tax loss. A tug of war took place between the taxpayer and intercepting officers with the former generally relenting due to commercial compulsions. Simple bona-fide errors faced harsh penalties along with demurrages and damage to goods. Courts have emphasized that mere technical mistakes — such as an incorrect vehicle number or typographical errors — should not automatically trigger hefty penalties or confiscation of goods, provided there is no evasion of tax. The judiciary² has consistently ruled that the presence of tax evasion is a necessary precondition for imposing such harsh penalties (Article published in January 2021 may be referred).

2  2022 (57) G.S.T.L. 97 (S.C.) Asst. Comm. vs. Satyam Shivam Papers Pvt. Ltd.

EXPORT DOCUMENTATION – ADMINISTRATIVE APATHY

Integration of customs and GSTN system for export refunds raised multiple data entry discrepancies forcing the Government to issue Circulars³ on the type of errors and the manual redressal by Customs officers (such as incorrect shipping bill number in GSTR-1, IGST amount paid on exports in GSTR-3B and not matching with customs data, exports not appropriately reported in GSTR-1/3B though rectified in GSTR-9, etc). Errors which were rectified in subsequent returns were also not being auto-populated for matching with customs data. In many cases, the errors could not be addressed on account of the limited purview of customs officials and lack of coordination with GST authorities. Obviously, courts frowned upon the revenue’s plea that the IT systems did not permit them to resolve the errors.⁴ High Courts compelled tax authorities to consider genuine representations on merits, rather than hide behind the limitations of IT systems. The judiciary’s stance was clear: administrative shortcomings should not defeat the substantive rights of taxpayers.

3  Circular 42/2017-Cus., dated 7-11-2017 , No. 5/2018-Cus., dated 23-2-2018, etc

4  [2023] 152 taxmann.com 247 (Bombay) Sunlight Cable Industries vs. 
Commissioner of Customs; 2024 (91) G.S.T.L. 145 (Guj.) BAJAJ HERBALS PVT. LTD. vs.
 Dy. Comm. of Customs, etc

REFUND APPLICATION – UNDERCLAIMING REFUNDS

The complexities of the GST framework also extended to the domain of refund applications, where procedural missteps and inadvertent omissions have often resulted in taxpayers underclaiming their rightful refunds. Given the intricate eligibility computations and the voluminous data required — from invoice-wise details to correlation with returns and shipping documents — errors are not uncommon. Applicants have found themselves short-claiming refund amounts due to misreporting of figures, incorrect selection of tax periods, or failure to include all eligible invoices or export documents. Moreover, in the absence of a mechanism for filing an additional refund claim in the same category, taxpayers resorted to filing refund in the residual ‘any other category’. Authorities claimed that having filed a refund claim for ITC once, another/supplementary application for differential amount of refund could not be filed. Judicial forums⁵ in numerous instances, directed authorities to permit rectification or additional refund claims—provided the error did not result in unjust enrichment or affect revenue interests. Where the portal’s technical limitations prevented additional claims, the judiciary has emphasised that substantive rights should not be defeated on mere technicalities, and that taxpayers should be allowed to present supporting documentation to substantiate their claims.

5 2023 (78) G.S.T.L. 324 (Guj.) SHREE RENUKA SUGARS LTD.vs. STATE OF GUJARAT

DRC-03 ERRORS – NAIL IN THE COFFIN

This simple document was also not immune to errors and inconsistencies. Taxpayers, while attempting to voluntarily discharge additional tax liabilities or rectify inadvertent errors through DRC-03 filings, often encountered further complications. Instances abounded where the particulars entered in DRC-03 were incorrectly mapped to the wrong tax period, tax head, or nature of liability—sometimes as a result of system’s rigid architecture or human oversight. Such mistakes led to confusion and, in several cases, double payments or misallocation of credits. Taxpayers faced arduous processes in seeking rectification before the Courts, as the GST portal does not provide for amending DRC-03 submissions⁶. As a result, what was intended as a means of self-compliance frequently became a source of technical and administrative frustration, occasionally culminating in protracted disputes. Such issue will also crop up when taxpayers would attempt mapping the DRC-03 with the electronic liability register through submission of DRC-03A forms.

6  (2024) 16 Centax 156 (Bom.) Rajesh Real Estate Developers Pvt. Ltd. vs. UOI

GSTR1/3B – OPPORTUNITY FOR CORRECTION

GST law envisioned a self-correcting system of GSTR-1, 2 and 3, where any data error at the supplier’s end could be identified and communicated at an invoice level by the recipient through GSTR-1A/2A. The adjustments/ rectifications were tabulated separately in GSTR-3 and necessary tax impact could be provided. Unfortunately, this two-way system was not operationalised and ultimately abandoned by the Government. As an alternative, a partial system of GSTR-1 and GSTR3B was introduced wherein the recipient was a mute spectator to the data uploaded and had to communicate through offline channels. Unless the supplier rectified the data in subsequent returns, the error persisted on the common portal.

Typically, errors involve incorrect reporting under appropriate heads – such as ITC under reverse charge / import of goods incorrectly reported as ‘All other ITC’; exempt values reported along with taxable supplies, outward supplies reported as B2C or with incorrect GSTIN, incorrect tax-type, incorrect POS for supplies, export transactions missed to be reported, credit notes reported as input tax credit, etc. Even-though net tax payable by the taxpayer was correct these errors caused significant confusion during assessments. The adjustments in subsequent returns were clubbed/netted with the respective tax period data. Since the GST form did not contain a separate tab or attachment for reporting tax adjustments of prior period errors, it was an onerous task for the taxpayers to explain these errors and equally challenging for the officer to verify them from the books of accounts.

STATUTORY PROVISIONS ON ERRORS IN GSTR1/3B

Section 37(4) (GSTR-1) and 39(9) (GSTR-3B) deal with such errors (omission or furnishing of incorrect particulars) in the GSTR returns. It specifically provides for appropriate adjustments in subsequent returns, subject to certain timelines. But there is a fine distinction between section 37(4) and 39(9) which leads to an interesting analysis.

Section 37(4) provides for adjustment of errors in GSTR-1 before 30^th November of the relevant financial year to which the details ‘pertain’. On the other hand, section 39(9) states that a person who discovers any omission or incorrect particulars (other than as a result of scrutiny, audit, inspection or enforcement activity) would be permitted to rectify the same in the return in which such error is ‘noticed’. The said section originally contained a proviso which permitted rectification in the return of September following the end of the financial year. What was the ‘relevant financial year’ (year of committing the error or noticing error) was unclear from the proviso. While the provisions for GSTR-1 specifically linked the amendment to the year to which such details pertain, the provisions for GSTR-3B were silent over it.

Conjoined reading of the proviso and section 39(9) indicates that since rectification is to be performed in the return in which it is noticed, the relevant financial year would be the one in which such error was noticed. Subtly this gives ample liberty to the taxpayer to rectify the data with an open-ended time frame (subject to departmental action) by claiming that he/she noticed such error in a particular month and not before. To address this lacuna, the proviso was amended vide CGST (Amendment) Act, 2018 by specifically linking the financial year to the month to which the details pertain. This amendment implies that the taxpayer is obliged to rectify the error latest by 30^th November following the financial year in which such error was committed. However, the said amendment has not seen the light of day as it is yet to be notified and hence does not have legal force.

Interestingly, the proviso which places a restriction on the adjustment has not fixed the outer time limit for such amendment (specifically the relevant financial year). This table will amplify the lacuna in section 39(9):

7 Substituted vide Finance Act, 2022 w.e.f. 01-10-2022 before it was read as, "the due date for furnishing of return for the month of September or second quarter

The ambiguity which was present in the original section continues to persist despite the legislation of this provision. Even during 2022, where the due date was shifted to 30th November of the financial year, the proviso failed to specify the relevant base year to decide the outer time limit for rectification of errors. Yet as a matter of practice both taxpayers and administration have limited themselves to rectifying errors latest by 30th November following the financial year in which the error was committed. Certainly, courts would take notice of the difference in wording in section 37(4) and the amended (but unnotified) wordings to arrive at the true purport of the section.

CIRCULARS ON ERROR HANDLING

Under the GSTR-1/2/3 system, the Board issued Circular No. 7/7/2017-GST, dated 1-9-2017 during the introductory phase of GST. Recognising that GSTR-3B has been introduced as a stop-gap measure, the Circular provided for recording the adjustments in liabilities (short ‘payment of output’ or ‘claim of input’, excess ‘claim of input’ or ‘payment of output’) between GSTR-1/2 and 3B into the final reconciliation table of GSTR-3. Essentially, the amendments at invoice level in GSTR-1/2 poured into GSTR-3 leading into the net tax liability. But on account of suspension of GSTR2/3, another Circular 26/26/2017-GST, dated 29-12-2017 was issued directing adjustments in GSTR3B (on net basis) and removing references to GSTR-3. The underlying philosophy was to discharge the net-short payment of tax or claim the excess payment of tax in subsequent GSTR-3B returns. But nowhere did the provisions provide for rectification of the original return itself.

BHARTI AIRTEL’S CASE

The above issue was taken by the Supreme Court in the famous Bharti Airtel’s case⁸, wherein the taxpayer had made an excess payment of INR 934 crores (in cash) on account of short availment of ITC in GSTR-3B. The Delhi High court observed that the said short claim of ITC was on account of non-operationalisation of GSTR-2A restricting the taxpayer from knowing the actual ITC. The Court read down the Circular and permitted taxpayer to rectify the original return by availing the said credit. Consequentially it would result in excess payment of output and a refund of excess cash paid. On appeal to Supreme Court, revenue argued that under a self-assessment scheme, the taxpayer is under a duty to examine its accounting records and need not await the implementation of GSTR-2A for availment of credit. The Court concluded that self-assessment should be performed based on the accounting records and GSTR data on the portal is only a facilitator. The express provisions of section 39(9) clearly direct adjustments of errors in the month in which it is noticed and hence the circular is in consonance with the said prescription. Since any rectification of original return would have cascading effect on revenue settlements, the provisions of section 39(9) directing adjustment in subsequent periods should be enforced completely. This judgement gave a thrust to the Government to enforce adjustment in subsequent returns rather than seeking correction in the original return.

8. Union of India vs. Bharti Airtel Ltd - 2021 (54) G.S.T.L.257(S.C.)
 reversing 2020 (38) G.S.T.L.145(Del)

ABERDARE TECHNOLOGIES’ CASE

In the meanwhile, the Bombay High Court in Star Engineers (I) Pvt. Ltd⁹ permitted the taxpayer to amend the GSTIN incorrectly reported in GSTR-1 on the premise of being a bona-fide error without revenue impact. The court held that if any rectification is not permitted it would amount to accepting incorrect particulars leading to an incorrect cascading impact.

But there were adverse rulings on this subject as well. In Bar Code India Ltd¹⁰ taxpayer’s plea for amendment in POS/ GSTN of recipient was rejected despite reference to the said decision. It held that a taxpayer should be aware of his legal responsibilities and merely because a loss is caused to its customer it cannot be resolved by seeking a rectification in GST return. In another decision in Yokohama India private Limited¹¹, the Telangana High Court rejected the plea of rectification after statutory timelines on account of the specific verdict in Bharti Airtel’s case.

9  2024 (81) G.S.T.L. 460 (Bom.)

10  2025 (93) G.S.T.L. 56 (P & H) BAR CODE INDIA LTD. v UOI

11   [2022] 145 taxmann.com 130/[2023] 108 GSTR 115 (Telangana)

In a twist of events, in another decision of Bombay High Court in Aberdare Technologies¹², the taxpayer sought rectification of the returns after the statutory deadline. The court directed the revenue to open the portal to rectify/amend the return data or alternatively permit a manual return. At the Supreme Court, the revenue’s SLP was dismissed with an observation that the right to rectify an error is embedded in the right to doing business. Accordingly, a taxpayer cannot be deprived of such right in terms of Article 14 of the Constitution. Denial of the right to rectify would cause double payment by taxpayer and hence the Court directed the CBIC to examine a more realistic timeline for correcting bona-fide errors. Despite being rendered at SLP stage, the reasoning providing in the decision would have the effect of a declaration of law in terms of Article 141 of Indian Constitution (extracted below):

“Right to correct mistakes in the nature of clerical or arithmetical error is a right that flows from right to do business and should not be denied unless there is a good justification and reason to deny benefit of correction. Software limitation itself cannot be a good justification, as software are meant ease compliance and can be configured. Therefore, we exercise our discretion and dismiss the special leave petition.”

12  2024 (89) G.S.T.L. 6 (Bom.) SLP dismissed in [2025] 172 taxmann.com 724 (SC)

RECONCILIATION OF BOTH DECISIONS¹³

Bharti Airtel’s case pertained to an error committed in GSTR-3B and the Aberdare Technologies’ case pertained to an error committed in GSTR-1. Though both contain similar provisions, the answer seems to be patently different. On the one hand, in Bharti Airtel’s case the plea for rectification (swapping of payment between electronic cash ledger with electronic credit ledger) was rejected u/s 39(9) as the section only permitted subsequent period adjustments (in the month the error is noticed), but on the other hand in Aberdare’s case, a rectification of the original GSTR-1 was directed on account of the error being revenue neutral. How do we reconcile these decisions?

13 Both decisions will fall under consideration in Brij Systems Ltd [2025] 
172 taxmann.com 722 (SC) case where an Amicus Curie has been appointed.  
But we have attempted to reconcile both decisions pending the Court’s verdict

On a finer reading, it appears that Bharti Airtel’s case is a declaration u/s 39(9) for cases where the taxpayer wishes to alter its self-assessment right (despite being revenue neutral). The tax payable under GSTR-3B was sought to be swapped from electronic cash ledger with electronic credit ledger. This was held as being impermissible u/s 39(9). Whereas the decision of Aberdare Technologies involved amendment of the details furnished in GSTR-1 (without alteration of the tax payable in GSTR-3B). There was no alteration of any legal right but merely a substitution of incorrect data fed into the GSTR-1. This difference leads us to the following classification and analysis:

•  Errors leading to alteration of legal rights (Legal errors) : such as replacement of cash payment with credit, reporting of credit notes under the head input tax credit, etc. These are errors can be said under exercise of a legal right and permitted only way of adjustment within due date prescribed in section 39(9), in terms of the Bharti Airtel’s case.
•  Errors of mere disclosure (Disclosure errors): such as incorrect reporting of GSTIN/POS, reporting of export sales under domestic tab, incorrect reporting of B2B as B2C supplies, etc. Such errors are merely incorrect data entry. Such errors fall under the domain of a fundamental right to do business in terms of Article 14 of the Constitution and permissible to be performed at any stage, in terms of Aberdare’s case.

SAMPLE CASE STUDY

Let’s take a case study to further appreciate the difference between the said errors. Mr A classifies a transaction as an inter-state supply and reports the same as IGST in the invoice/ GSTR-1 and the GSTR-3B. On noticing that that the said transaction is correctly classifiable as an intra-state supply, the taxpayer would be permitted to adjust this excess payment of IGST and the short payment of CGST/SGST accordingly in their subsequent period GSTR-1/3B. This would be legal error which has arisen from the exercise of a legal right which was subsequently overturned. Bharti Airtel’s case would operate in such a situation and the time-limits specified in section 39(9) would be applicable for such adjustments. The taxpayer would not be permitted to have the return reopened for this rectification.

Whereas, lets also take a slightly contrasting case where Mr A correctly classifies the transaction as intra-state supply in its invoice and GSTR-1, but inadvertently reports the same as inter-state supply in its 3B resulting in incorrect discharge of tax. Going by Aberdare’s case, this is a pure disclosure error which should be permitted to be rectified as its fundamental right to do business and not be governed by strict time limitations. No legal right was incorrectly exercised in such a situation and hence the Bharti Airtel’s case should not apply. A step further, the taxpayer should in fact be permitted to have the Form GSTR-3B reopened and replace the same with the appropriate tax entries and accordingly redrawn. Certainly, there would be technical challenges for the GSTN to implement, but such challenges should not hamper the fundamental right of the taxpayer to report the correct figures on the portal.

The Karnataka High Court in Orient Traders¹⁴ case stated that an incorrect reporting of the ITC in a wrong head cannot be subject to the rigours of section 39(9) and distinguished the Bharti Airtel case. Being a disclosure error, the court ultimately directed rectification of the GSTR-3B return through online or physical mode. Though the court stated that this decision does not have precedential value, it underpins the thought process of the judiciary over fundamental taxpayer rights.

14  WRIT PETITION No.2911 OF 2022 (T-RES)

ERROR VS. TECHNICAL LIMITATIONS

Many a times the vivid line between an ‘inadvertent error’ and a ‘technical limitation’ seems to be blurred by the tax officers. In a case involving transition credit¹⁵, the taxpayer originally reported the transitional credit claim under a wrong head of TRAN-1 and consequently was unable to file the TRAN-2. Despite the direction of the Supreme Court in Filco’s Trade Centre to reopen the portal, the taxpayer was unable to file TRAN-2 in the reopened form as well and filed grievances before the relevant authorities. Now in this case, the entire thrust of the argument of the revenue was that claim of transition credit under 140(3) – Table 7A is different from the credit under Table 7B. Accordingly, the claim is inadmissible. The High Court took consideration of the technical limitation even in the re-opened form and directed the officer to permit the claim of refund.

15  2024 (88) G.S.T.L. 166 (Guj.) NIKHIL NAVINCHANDRA MEHTA vs. UOI

Similar would be a case where a taxpayer issued a credit note in a particular month and did not have sufficient positive turnover as output for adjustment. The taxpayer crossed the time limit specified u/s 39(9) for adjustment of the credit note. But what needs to be delved into is whether this credit note adjustment arises on account of a ‘technical limitation’ or a ‘human error’. CBIC Circular No. 26/26/2017 (supra) acknowledged that since the GSTR-3B is not equipped to record negative entries, the adjustments in output tax should be performed in subsequent months and wherever this is not feasible a refund may be sought. If the adjustment is arising from a technical limitation to report a negative liability in GSTR-3B, it would be incorrect to classify this as an ‘omission’ or ‘incorrect particular’ as specified in section 39(9). Consequently, the provisions of section 39(9) and its time limitations would not apply for adjustment of credit notes arising on account of negative entries. Advance adjustments which are not permitted to be reported in GSTR-3B on account of negative entries may also be treated accordingly. These adjustments should be permitted as part of fundamental rights of the taxpayer.

WAY FORWARD – BALANCING EQUITY AND TAX CERTAINTY

Courts have granted relief where taxpayers demonstrated bona fide intent and sought to rectify mistakes within the timelines prescribed by law. Judicial scrutiny in such cases often revolves around whether the taxpayer acted in good faith and whether the error resulted in any real loss to the revenue. High Courts frowned upon revenue masquerading behind technical limitations on the reasoning that the portal is only a facilitator and not the driver of the GST law. Accordingly, revenue has been directed to allow corrections either online or manually for assessment purposes.

Ultimately, legal principles in this domain revolve around distinguishing between legal errors (exercise of legal rights) and disclosure errors (data entry omissions or mistakes in reporting). The principle of equity underpins most judicial interventions: corrections are permissible, but only after due verification, and not via unchecked self-correction that could undermine the scrutiny and integrity built into the system. This approach seeks to ensure that the GST regime is not only robust and reliable, but also fair and responsive to practical realities faced by taxpayers. The Government may consider constituting a judicious panel (comprising technocrats and legally reputed personnel) to resolve past and future disputes. As famously said by the English Poet Alexander Pope, that to err is human and to forgive is divine…!!!

BCAJ Admin

The thought of penning this article emerged from two decisions of the Bombay High Court¹: The first was a case where a mammoth penalty of ₹3,700 crores was imposed on a key employee of the Company, and the second involved a case where past directors were made liable for tax dues pertaining to a period after their resignation. While the Court ultimately granted relief from such over-ambitious notices, the decision brought to the forefront the monetary exposures hovering over individual(s) operating under the aegis of a company.

1.  Shantanu Sanjay Hundekari v. UOI (WP (L) NO. 30198 OF 2023) & Prasanna Karunakar Shetty v State of Maharashtra (2024-VIL-358-BOM)

Directors are at the forefront of recovery of any statutory liability. In this context, the GST law provides for three areas for discussion — (a) Recoveries of tax dues from directors of private companies including those arising during liquidation; (b) Penalty recoverable from directors for offences committed by Companies; (c) Penalty imposable on directors for aiding or abetting an offence committed by Companies.

The first two categories are recovery provisions where the tax, interest or penalties would be first imposed on the company and in case of their non-recoverability, the extended provisions enable the revenue to recover the tax and penalty from the directors of such companies u/s 89 or 88(3) of the CGST/SGST Act, 2017. The said provisions are exclusive to private limited companies and hence public limited companies fall outside its purview. The third category involves a direct imposition of penalty on the director for aiding or abetting offences u/s 122(3) of the CGST/SGST Act and this applies to directors of both private and public limited companies.

Liability of Directors on Private Company (Section 89& 88(3))

Under the Companies Act, the personal liability of directors is limited to the acts which arise out of breach of trust, fraud, etc. However, it is practically cumbersome for the revenue department to prove such acts have resulted in non-recoverability of tax liabilities. Hence, the provisions of section 89 have been specifically legislated as deeming provisions:

“Notwithstanding anything contained in the Companies Act, 2013 (18 of 2013), where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both for any period cannot be recovered, then, every person who was a director of the private company during such period shall, jointly and severally, be liable for the payment of such tax, interest or penalty unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.……….”

Similarly, section 88(3) contains statutory powers to collect tax dues of companies undergoing liquidation –

“(3) When any private company is wound up and any tax, interest or penalty determined under this Act on the company for any period, whether before or in the course of or after its liquidation, cannot be recovered, then every person who was a director of such company at any time during the period for which the tax was due shall, jointly and severally, be liable for the payment of such tax, interest or penalty, unless he proves to the satisfaction of the Commissioner that such non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.”

While both these provisions are broadly similar in nature, a comparison throws up certain differences:

• Section 89 provides for recovery even during its regular operations, section 88(3) provides for recovery only during the winding up of the company – being more specific, section 88(3) would prevail over section 89 in the specified circumstances;
• Individuals holding the directorship during the existence of the company, especially during the initiation of recovery provisions, are covered under section 89, but section 88(3) applies only to directors holding their post at the time the tax was due on the Company — subsequent directors may not be covered by the provisions of section 88(3);
• Section 89 contains overriding provisions which is absent in section 88(3), enabling it to surpass the Companies Act for recovery of amounts.

With these key differences in mind, the following elements can be dissected and analysed: (i) the overriding character of Section 89; (ii) the pre-condition that the tax dues should be “non-recoverable”; (iii) the tax dues should be in respect of any supply of goods or services; (iv) a negative presumption that directors are liable for payment of tax and rebuttable only if the directors prove that such non-recovery is not on account of gross neglect, misfeasance or breach of duty; (v) the director(s) of the company are jointly or severally liable for such recoveries.

Overriding character

A private limited company, though a separate legal entity, is an artificial person under law. Therefore, the decision-making functions of a company are entrusted to a Board of Directors mandated to operate under a fiduciary capacity. While the directors act as agents or representatives before third parties, the company continues to be primarily liable for all acts performed by the directors within their capacity.

Section 166 of the Companies Act, 2013 specifically lays down that the Directors should operate under the memorandum and articles of association as documented by its members. It is the duty of the Director to act with ‘diligence’ and in ‘good faith’ only to promote the best interests of its stakeholders. The decisions taken by the director should involve reasonable care, judgement and skill independent of personal interests. In case of conflicts (direct or indirect), the director ought to refrain from taking any undue advantage or gain. As directors of a company, they may be held liable for any loss or damage sustained by the company because of any breach of duty or failure to disclose a personal financial interest in a particular matter. They may be directed to repay any gain or advantage derived from their fiduciary duty and liable for penal action under the said Act. Therefore, the Companies Act expects directors to honour their fiduciary capacity and protects them from any liability in case of honest diligence. Losses on account of business exigencies or external factors despite reasonable care do not generally devolve upon the directors.

Consequently, all tax liabilities would first be recoverable from the company unless there are specific provisions enabling recovery from the directors or key managerial personnel. By invoking the Companies Act, recovery of any tax liabilities (as a civil liability) from directors of the company can emerge only after the establishment of a ‘fraud’ or ‘breach of duty’ on the part of the director concerned. Moreover, only the officer in default would be liable and other director(s) disengaged from the finance/ tax function could take shelter as not being in default and outside the recovery net. Being a very narrow provision, the Companies Act places a larger onus on the tax administration to establish such a breach of duty and only then proceed to recover the civil liabilities from the director(s) u/s 166 of the Companies Act, 2013.

Section 89 of GST law overrides this feature of the Companies Act, 2013 for the purpose of recovery of tax dues from private companies. The section is aimed at “looking through” the “separate legal entity” and identifying the directors who have been negligent as representatives of the Company. It simply states that tax recovery can be made from any director of the company ‘jointly’ or ‘severally’ in case taxes are non-recoverable from the Company. An onerous presumption has been placed that the directors have breached their fiduciary duties unless they prove that the non-recovery of taxes is NOT on account of willful neglect, fraud, breach of duty, etc. In view of the negative presumption, the director must come forward to prove that they have been diligent in complying with the statutory responsibilities and such default is not attributable to them. Directors would be obligated to enlist the efforts taken to ensure tax dues were discharged and the failure to discharge them was beyond their reasonable control.

On the other hand, section 88(3) does not contain overriding provisions akin to section 89. Can this be taken to imply that the Companies Act provisions would influence the provisions of section 88(3) at the time of recovery actions on the winding up of the company? It appears that unlike section 89, section 88(3) would have to undergo the rigorous test of fraud, etc. being established prior to invoking recovery from directors during the winding up of the Company. Section 88(3) appears to be milder to this and hence read harmoniously with the Companies Act provisions.

Non-recoverability from the Company

Section 89 of GST law specifies that the taxes should be “non-recoverable” from the Company. It places an onus on the department to exhaust all modes of recovery prior to calling upon directors to discharge the liability of the company².

2. Indubhai T. Vasa (HUF) v. ITO [2005] 146 Taxman 163 (Guj.);

As a first step, the revenue officer would have to establish that tax, interest and penalty are available for recovery u/s 79. The revenue officer cannot invoke the said provisions pending investigation, adjudication, assessment, etc., Even in respect of confirmed tax demands which are under appeal, sections 78 and 107(7) or 112(8) stay the recovery of the tax dues along with interest and penalty. Hence balance amounts may not be available for recovery until the matter attains finality i.e., matter being decided in the apex court or the right of appeal not being exercised by the taxpayer.

Coming now to section 79, it provides multiple avenues to the tax department for recovery of tax dues of the company i.e., bank accounts, debtors, goods, movable / immovable property or as arrears as land revenue. The said section should be exhausted completely and cannot be short-circuited to directly attach the bank accounts / properties of the director. In essence, recovery officers should reach out to directors only once section 79 leads to a dead end.

Even before the tax department alleges that taxes are due from directors, a specific conclusion is to be arrived at and recorded in writing that the taxes are ‘non-recoverable’ from the company. Under parimateria provisions of Income-tax (section 179), the Bombay High Court³ held that only after the first requirement is satisfied would the onus shift on any Director to prove that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. In the case of Amit Suresh Bhatnagar⁴, the court quashed the attempt of the revenue to take effective steps of recovery from the Company and stated that the phrase “cannot be recovered” requires the Revenue to establish that such recovery could not be made against the Company, and then and then alone would it be permissible for the Revenue to initiate action against the Director or Directors responsible for conducting the affairs of the Company during the relevant accounting period. The provision has been specifically inserted to shield the directors from any hasty recovery by the tax department. In summary, only those amounts which are recoverable under section 79 from the Company fall into consideration under both sections and the tax department should exhaust all such recovery remedies under section 79 for a tax due to be non-recoverable.

3. Manjula D. Rita vs. PCIT, [2023] 153 taxmann.com 468 (Bombay)
4. [2009] 183 Taxman 287 (Gujarat)

Now let us take a peculiar circumstance where a company enters insolvency and is either wound up or taken over by another company under a resolution plan. The process of insolvency involves agreement over a resolution plan by operational / financial creditors and other stakeholders. The government’s debt being classified as operational debt would in all likelihood be trimmed down under the resolution scheme. The government being a party to the said proceedings is bound by the resolution plan approved by all creditors in terms of section 31 of the Insolvency Bankruptcy Code⁵. Once the primary liability on the company’s account is reduced, the vicarious liability on the directors also stands correspondingly reduced. The phrase “non-recoverable” from the company presupposes a right to recover the amounts from the Company. The tax authorities cannot state that the amounts which have been written off continue to be recoverable from directors despite the resolution plan. Moreover, with respect to the reduced tax demands, tax authorities would have to abide by the timelines provided in the resolution plan prior to concluding that taxes are ‘non-recoverable’.

5. Ghanashyam Mishra & Sons Pvt. Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. — [2021] 126 taxmann.com 132 (SC)

Presumption as to gross neglect, breach of duty, etc.

Section 89 places a statutory presumption that the non-recovery of taxes is on account of gross neglect, and breach of duty on the part of the directors. Since sovereign dues are considered to be supreme obligations, directors (in their fiduciary capacity) are expected to arrange their affairs in such a manner that sovereign defaults are avoided. The presumption is with reference to “nonrecovery” of tax dues and cannot be extended to circumstances prior to the fastening of tax dues — i.e., it refers to the circumstances after the tax demand is affixed on the company and the corresponding actions taken by the directors to make appropriate arrangements for payment of the said tax demands rather than the decision making resulting in the tax demand. For e.g., the directors cannot be held responsible for incorrect classification of goods/services but would certainly be responsible for payment of tax dues once the tax on incorrect classification is confirmed against the Company. Probably the intent of the section is to deter directors from taking evasive acts by depleting the company’s assets and making them responsible for the non-recoverability of taxes. The directors on the other hand would have to overcome the presumption by contending that despite the tax demand, business exigencies and external circumstances have resulted in insolvency and non-recoverability of tax demands.

In Maganbhai Hansrajbhai Patel⁶, the Gujarat High Court held that gross negligence etc., is to be viewed in the context of non-recovery of the tax dues of the company and not with respect to the functioning of the company when the company was functional. In that case, the revenue had placed the entire focus and discussion with respect to the Director’s neglect in the functioning of the company which was set aside by the Court. A similar view was also taken by Gul Gopaldas Daryani v. ITO⁷ wherein it was held that though the burden is cast by statute in the negative and on the director concerned, once in defence the director places necessary facts before the revenue to establish that non-recovery cannot be attributed to gross negligence, misfeasance or breach of duty on his part, the revenue is required to arrive at definite findings on negligence on part of directors. In this case, the director could not pay tax dues as its hotel building got damaged in the earthquake, in view of the fact that an insurance claim had been raised but was not passed by an insurance company and civil disputes were still pending, it could not be regarded as a case where director failed to take measures for protecting property or interest of the company. A similar view was held in Ram Prakash Singeshwar Rungta vs. ITO⁸ where even though directors were responsible for the non-filing of returns were not imposed with such harsh recovery as the emphasis of the section is with respect to neglect during the recovery proceedings against the company and not otherwise.

6.  [2012] 26 taxmann.com 226 (Gujarat)
7.  [2014] 46 taxmann.com 35/227 Taxman 190 (Mag.)/367 ITR 558
8.  [2015] 59 taxmann.com 174/370 ITR 641 (Mag.)

Status of directorship

The other question that arises is whether the individual should be in active directorship during the action of recovery from the tax department or past directors could be engulfed in the recovery actions. Recovery action against directors could be with reference to three different tax periods (a) holding directorship during the relevant tax period for which demand is raised; (b) holding directorship at the time of confirmation of tax demand; and (c) holding directorship while recovery attempts are made by tax department.

This section fixes personal liability on directors based on the nature of acts performed during their directorship. The focus of the section is with reference to the responsibility of the directors to meet tax dues and deter depletion/diversion of assets of the company for other purposes. Exclusion from recovery can be claimed only where the directors prove that they have acted in good faith and business exigencies have resulted in non-recovery of taxes. Naturally, this implies that the individuals should be directors at the time the tax demands are raised and recovery attempts are being made by the revenue. Thus, individuals holding directorship during the relevant tax period for which tax demand has been raised cannot be held responsible for tax demands as they cannot be expected to establish bonafides at a time when they are not holding directorship. But the Bombay High Court⁹ has held that the true purport of Section 179(1) of the Income Tax Act is that a person must not only be a Director at the relevant assessment year but also a Director at the time when the demand was raised and such Director can be held responsible only and only when “non-recovery” is attributable to gross neglect, misfeasance or breach of duty on the part of such Director.

9. Prakash B. Kamat vs. Pr. CIT [2023] 151 taxmann.com 344 (Bom.)

Unlike section 89, section 88(3) speaks about recovery of tax liabilities during the liquidation of companies and specifies the directors who were holding the position at the relevant tax period for which the taxes were due as responsible for payment of the tax dues on liquidation. Due to the specific identification of directors and linkage to a particular period of default, other directors would not be covered by such recovery action even if they are in directorship during the liquidation of the company.

Tax dues with respect to the supply of goods or services

Interestingly, section 89 provides for tax recoveries only in respect of “supply of goods or services”. This is a consequence of borrowing terms from parallel provisions under the Income Tax Act where the scope is restricted to tax dues in respect of the income of an assessee. Probably, the legislature must have missed recognizing that recoveries under the GST law can arise on four counts (a) output tax in respect of the supply of goods/services; (b) input tax on erroneous utilization; (c) erroneous refunds; and (d) transitional credit. With the missed phrases, one can argue that the recoveries from directors could be only in respect of short payment of output tax on account of non-payment, short-payment, under-valuation, rate classification, etc. While revenue may argue that such a narrow reading would make the provision toothless, courts may view such exceptional provisions very strictly.

Joint and several liability

The phrase ‘joint and several’ liability implies that the directors are both collectively or individually liable for the revenue. The revenue authorities can at their discretion ‘pick and choose’ the directors who they wish to pursue for recovery of their tax liability, irrespective of their involvement in the affairs of the company. To put it differently, while Director A may be responsible for gross negligence in protecting the assets of the company, the revenue can choose to pursue Director B for recovery of its entire dues, no matter that Director B may not have had an active role in the company. In the decision of the Gujrat High Court in Suresh Narain Bhatnagar v. ITO¹⁰ the ground raised by the director of the company being only in a technical capacity with limited control did not ipso facto make Section 179 of the Income Tax Act inapplicable to the director. That Section 179 would continue to apply even if the petitioner was functioning in a limited capacity vis-à-vis the company. Hence, it is quite clear from this decision that the degree of involvement of a director in the affairs of the company is not a yardstick in deciding whether Section 179 is applicable to the director or not.

10. [2014] 43 taxmann.com 420/227 Taxman 193/ 367 ITR 254 (Guj.)

Many times, the revenue makes the error of applying the phrase joint and several liabilities qua the directors and the company. Revenue officials pursue the remedy of recovering the tax liability from directors of the company on the premise that directors are jointly and severally liable to the company. Being a vicarious liability, it is important to put in perspective that the joint and several liability is qua the directors among themselves and not qua the company. It is only after crossing the stage of nonrecoverability from the company would the revenue be permitted to make all directors jointly and severally liable for such non-recoverable dues. This can also be confirmed from the earlier phrases which require the revenue to exhaust the recovery from the company and only then proceed to recover the dues from directors.

Time limitation

Section 89 does not contain any time limit for the initiation of recovery action. But it is well understood by many courts including Parle International Ltd. vs. Union of India¹¹ that delay in adjudication defeats the very purpose of the legal process and a taxable person must know where he stands and if there is no action from the departmental authorities for a long time, such delayed action would be in contravention of procedural fairness and thus violative of principles of natural justice. In this case, a long period of about 8 years was set aside as being beyond a reasonable period of time. A similar principle may be adopted in specific cases of delayed recovery after the finalization of tax demands.

11. [2014] 43 taxmann.com 420/227 Taxman 193/ 367 ITR 254 (Guj.)

Type of Directorship

The above provisions include all the directors of the company as responsible for the statutory dues. Among the many types of directors in a Company — managing directors, full-time directors, non-executive directors, independent directors, nominee directors etc., questions arise on the applicability of the above provisions to directors. While executive directors cannot be said to be outside the scope of the above provisions, nominee directors could take shelter in view of their restricted role in the decision-making process of the Company. One would be mindful that the nomenclature by itself does not result in automatic immunity under the above widely drafted provisions. It is the appointment letters, emails/ transcripts, and board resolutions which would establish diligence on their part. Independent directors are appointed for specified public limited companies, and listed companies and hence would anyway be outside the scope of section 89 or 88(3) which are applicable only to private limited companies.

Penalty imposable for aiding/ abetting an offence

Directors can also be held responsible for aiding or abetting an offence by Companies. Section 122(3) provides for penalties on any person who aides/abets an offence as enlisted under section 122(1)(i) to (xxi). Naturally, once a Company is charged with any of the list of offences, directors who are in the knowledge of these offences would also become vulnerable to a charge of penalty under section 122(3). The phrase ‘aiding or abetting’ has its roots in the Indian Penal Code and implies an element of mens-rea in the act of instigating or encouraging a person to commit an offence, or promoting a person into a conspiracy of an offence, or willfully aiding another to facilitate in furtherance of the offence. Since men-rea is not a virtue of artificial persons, the individuals (especially directors) behind the scenes would be considered to be involved in the commission of the offence of companies. The maximum penalty in such cases would be ₹25,000 under each enactment.

Despite all the technicalities discussed above, directors of both private and public companies are answerable under the Companies Act for all their actions. Once fraud by directors is established, it vitiates all technicalities and the Companies Act would make the directors personally responsible for all recoveries by lifting the corporate veil. This makes the role of the Director in financial decision-making cautious and critical. Board minutes, demarcation of funds, operational involvement as evidenced by emails / employees, etc. would play a pivotal role in assessing the diligence of the director. While one may argue that the onus is on the revenue to allege any misdoing, the specific presumptions in law have shifted the primary onus on the directors to establish their bonafide, which obviously involves a written document rather than mere oral assertions.

Recovery provisions are extreme steps where the revenue is empowered to pierce the corporate veil and make the directors responsible for the discharge of their fiduciary duties. As is evident the section is a separate code in itself and all pre-conditions of the section have to be satisfied and duly recorded prior to initiating action against the directors of the company. The directors on the other hand must ensure that they manage the affairs responsibly and protect the assets of the company to discharge the statutory liabilities. The intent of the section is to make directors responsible where the revenue has been deprived on account of fraudulent depletion of assets of the company. Amongst the directors, each director should take precautionary steps and inter-alia act as a check for actions by other directors keeping in mind the overall interest of the company. In law, these matters are addressed by Courts based on the facts produced by the directors in their defence and hence the directors need to record all their actions to prove their diligence in their duties.

BCAJ Admin